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The corporate outsourcing boom

Litke, Ronald | Feb 01, 1996

In an era of downsizing, trimming, and greater efficiencies, major American corporate real estate managers throughout the country are affirming the benefits of outsourcing their real estate activity. From the negotiation of individual leases all the way to strategic planning and cost-benefit analysis, from domestic warehouses to manufacturing plants across the world, outsourcing has evolved from a trend into a critical economic factor.

This has turned into opportunity for real estate companies working in all property types, many of whom have grown substantially with the advent of outsourcing. The development of brokerage and management assignments on a large scale has brought with it an increase in staffing to handle the work. The increasing sophistication in financial analysis, acquisition and disposition of properties, asset and property management, facilities management, and consulting continues to advance quickly, and it may be changing the makeup of real estate companies for good. Those with a basic specialty have reached out to others with complimentary talents to form partnerships and alliances and create new, larger, more diverse companies. Whereas niche emphasis may have seemed like an acceptable strategy at the beginning of the decade, growth and diversification now seem to be the new goals.

OUTSOURCING, OUTREACH

What also is interesting is the range of operations of these companies. Global thinking is more than a term; it has become a reality for real estate. The Dallas-based Staubach Co. -- known as a strong regional real estate services company -- recently has expanded, with operations throughout the country and in Mexico. According to Larry Kimbler, executive vice president, this has been a natural growth. It was accelerated by the Staubach Co.'s involvement with GTE, whose real estate work Staubach handles in 16 states.

"We are essentially providing the real estate function for the company in those states," says Kimbler.About 6,000 properties, including about 1,000 leases. In addition to that, we provide lease administration, acquisition and disposition, planning and tax audits, and strategic planning for their properties throughout the country." The scope of that work led to the creation of a separate entity within the company "to handle significant outsourcing assignments that required more talent and more service," Kimbler says. The GTE work in particular has been challenging, he adds, "because many of the properties are quite small and in remote locations. But it is still important for us to fit that activity into the whole, and make each transaction fit properly into the bigger picture. But clients deserve that kind of service, and it's our obligation to provide it."

Perhaps the longest-running outsourcing operation is New York-based International Service System (ISS), which operates 135 offices in 34 countries and four continents, deploying 125,000 employees across the spectrum of real estate services, says Bettina Browne, executive vice president. "We were well-positioned to take advantage of the movement toward outsourcing as early as 20 years ago," she says.

For many years, ISS was a task-oriented operation, taking on individual assignments on a short-term basis. As corporate outsourcing -- in all kinds of tasks -- became more prevalent, ISS developed into a large service operation, working in cleaning, telecommunications and other services, and eventually decided on a strategy of bundling the services together and aiming at Fortune 500 companies.

It worked well. Browne points specifically to ISS's relationship with Kodak. "We began with them by taking on individual assignments in 1989, handling a variety of tasks throughout their corporations," she says. "In 1991, we formalized the arrangement and now service not only Kodak's real estate, but also mechanical systems and other types of facilities management in America and across the world. This kind of arrangement shows how far outsourcing has come. Corporate real estate involves so much more than acquisition and disposition: it relates to an entire financial strategy that goes to the heart of a business and how it grows. A good service provider can participate in that growth in many ways."

Working With Tools

Steven H. Jaggard, the president and CEO of ONCOR, an organization of independent commercial real estate firms in over 200 markets, definitely sees outsourcing as an asset for strategic planning. The system was established in 1977 to service corporate real estate departments with long-distance real estate needs.

"Our clients outsource to cut costs, of course" he says, "but they also do it to keep their own focus on what they do best, and assign tasks to others who do their jobs well. Things like market analysis, lease analysis -- these are left to our individual members in their respective markets. There are often teams of ONCOR companies working for a single corporate client. It all adds up to bringing the highest expertise to that client."

ONCOR completed more than 600 transactions in 1995, and Jaggard sees only growth in the future. "I think there will continue to be a need for service companies for corporate real estate. Our clients are still determining exactly how much they want to outsource. In the long run, our clients wifl likely use a strong combination of in-house capabilities combined with ONCOR firms and others."

INTERNAL DIVERSIFICATION

On the other hand, some long-established real estate firms have diversified themselves to meet the demands of outsourcing. Dallas-based Trammell Crow, one of the nation's larger real estate firms, has made a significant move into outsourcing since 1990.

"The vision of our business is to be a complete service provider," says Bill Concannon, president of Trammell Crow Corporate Services, which operates from Stamford, Conn. "As one of the first national real estate service providers that contracted with Corporate America, we were among the first to place into contracts any number of discreet services for corporations. That part of our business now makes up 20 percent of the overall profit stream of our total company."

Trammell Crow has made a substantial investment in service. "It takes people as much as anything," says Concannon. "We have trained and worked with our people to have them understand the larger economic picture as it relates to real estate and, to our clients, how it relates to shareholder value. On our side, that has meant investments in management information services, capabilities that improve our management skills to get the client to make his real estate be more flexible to perform better in a competitive environment.

"For instance," he continues, "leases that track the product lifecycles of certain businesses. Leases that track operation aspects of customers. Innovative financial departments to formulate scenarios that leverage occupancy as a strategic tool." Trammell Crow has worked for many years for the Travelers Financial Group, all the way from facilities management, including their headquarters, to a comprehensive real estateservices arrangement. "Companies like Travelers have grown up to realize that companies can operate their real estate in a way that contributes significantly and profitably to their overall financial condition. As those conditions tend to change dramatically, any real estate firm has to be ready to provide the kind of service and expertise that places the client in a strong competitive position for growth."

LEARNING THE CULTURE

Part of the result of outsourcing is that real estate companies use the vernacular of corporate culture. As the level of service and sophistication has increased, the cultures have merged to an impressive degree. The Edward S. Gordon Co., a commercial real estate firm in New York, has been involved in outsourcing "for nearly a decade, before the terminology was institutionalized," says S. Howard Fiddle, managing director for the company. "In that time we have learned to better understand their needs and what they expect." Gordon has enjoyed a relationship with Hewlett-Packard "that typifies successful outsourcing."

With approximately 40 million sq. ft. of real estate in its domain, Hewlett-Packard keeps Gordon, as one of its outsourcing partners, quite busy. "It's much like the relationship a large corporation may have with several law firms," Fiddle explains. "They have come to rely on outsourcing for real estate to help them solve problems that even a well-organized and sophisticated department such as their own just does not have the time or resources to complete." Hewlett-Packard formerly owned many of its buildings, but recently has switched to sell and lease in order to unleash cash for investment in other areas of the company.

Understandably, competition for outsourcing business has grown considerably and has many people wondering if the competition would squeeze profit margins.

A typical case was two years ago, when Chicago-based Ameritech, an $11-billion Baby Bell company, announced it would place facilities management of more than 45 million sq. ft. of real estate in five states up for bid, at the time the largest corporate outsourcing. An Ameritech general manager said that his company "did not want to be in the real estate business" anymore. Ameritech was spending approximately $250 million annually on 3,500 buddings, and had a goal of reducing costs by 20 percent, or $50 million, to pare down the company as it prepared to enter the supercharged information highway fray.

Chicago-based LaSalle Partners was the big winner on the property management side, and John Wallerius, a managing director for the firm, feels comfortable not only with the work but also the profit.

"The management of 48 million sq. ft. keeps us busy, to be sure, but it's also important to realize that we are a strategic partner in how that real estate will be managed to bring the company the highest yields."

Ameritech had only recently consolidated five different real estate departments (one in each state) which, Wallerius says, "had developed different ways of managing the properties in their control."

LaSalle's first assignment, then, was to bring standardization to the process, "and develop systems hat could be followed thro company, particularly with regard to cash management and capital expenditures," he says. "Their real estate was generally evaluated together, so we developed a certain budget discipline that evaluated each building on its own terms and within its own market, sort of a bottom-up approach. That way, individual properties could be tracked thoroughly and accurately, evaluated on their own merits and their own needs. Of course it took a highly sophisticated system to bring this kind of discipline together, but we have made tremendous investments on our own in software development and applications to meet the challenge, and we think we're doing quite well."

Communication Above All

Many of the established real estate firms, such as 78-year-old Cushman & Wakefield, like to think of themselves as firms that have performed outsourcing for most of their history.

"Our corporate services program is founded on the premise that each corporation has its own unique set of resources, business objectives, and operating procedures, and we tailor our services to those aspects," says O.B. Upton, executive managing director of corporate services, based in San Francisco.

Upton also is quick to point out that these services do not apply only to the larger corporations. "There are a number of smaller, though fast-growing companies, that need the same services as larger corporations. Many of these companies will be expanding, and real estate is an essential factor in their growth. Across the board, what is important about outsourcing is that companies can task out certain types of business to focus on their core objectives. We're helping to free them of certain tasks that will divert their resources -- often personnel -- from achieving their objectives. We like to think that we are efficient, and that the costs of outsourcing are a worthwhile investment."

Upton says that issues like property management, tax appeals, auditing and management often are better left in the hands of specialists.

"We have more than 100 professionals devoted to research in those areas alone. In today's environment a company like ours must bring sophisticated process management in communication and information technology to overlay on top of the local network and expertise of the client. What makes outsourcing successful on a national or international basis is the ability to bring this technology to combine with local market knowledge to provide the services efficiently. It takes an enormous investment on our part to operate these systems worldwide, but the technology makes it profitable."

"In the end, outsourcing is a means for Corporate America to make its real estate more efficient, and essentially do what other industries have been doing for many years" says Bruce Mosler, regional presiaent and vice-chairman of the New York-based Galbreath Co., whose major emphasis is in commercial properties. "As these companies become more aggressive internationally, the coordination of real estate commitments requires an outside vendor. There is simply more responsibility and less people to handle the job. Therefore, we are asked to deliver that expertise and service."

One of Galbreath's major clients, Citibank, is a case in point. "They have millions of square feet domestically and internationally," Mosler says. "The key to our success with them is being honest as to where we can deliver service. We can't be all things to all people, so we focus on our capabilities in the 14 cities we operate in America and our overseas joint venture partners. In those areas, we deliver."

Mosler believes that the strategic processes of outsourcing -- analysis, budgeting, projections -- "is at least as important as the mechanical processes involved in providing the client with the best service and consultation. The key is being able to balance both aspects of the relationship to serve the client's objectives.

"Real estate firms have a due diligence threshold," Mosler concludes. "All of us are in business to make a profit, but there's a way to do it fairly so that clients want to continue the relationship. If we do our homework, staff the assignment properly, think strategically, and maintain communications,

we will be successful. That's what clients expect, and that's what they pay for." For Galbreath, the proof has been in one of its larger assignments, working for Dayton, Ohio-based Mead Corp. Begun in September 1994, the assignment involves the administering of 13.5 million sq. ft. in 46 states, as well as operations in Canada and Mexico. According to Harry Henshaw, senior vice president in Galbreatws Columbus office, "We have become a real partner with the client, in this case Mead Corp. We are involved in day-to-day operations, and that includes the no-nmoney transactions such as right-of-way, easements, agreements and other highly detailed tasks that keep us talking every day, in addition to the larger transactions.

"This assignment provides us with the opportunity to serve corporate objectives and further our own expertise by internal development of resources, not just technique." Henshaw believes no matter how large the assignment, the ethic of service is still the most important aspect of the job. "We have to learn how to integrate our resources with an existing real estate department, or provide resources for a company that has dosed down that aspect of business, or help expand those companies that have a different objective for their real estate."